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A discussion with the SCPF Trustee Board

The SCPF Trustee Board answer questions from members on a range of subjects including the investment strategy, the valuation and indexation.

A discussion with the SCPF Trustee Board

TIM MORRISON

Hello. My name is Tim Morrison and I’m Chair of the Shell Pensions Trust, which is the governing body of the Shell Contributory Pension Fund. I’m joined here today for this trustee discussion by Sue Jones who’s Chair of the Technical and Communications Committee and by Clive Hopkins, Chair of the Investment Committee.

In the last edition of the Source we asked members to send in some questions and today we’re going to answer those.

Well, Sue, Clive, we’re living in interesting times.

Actually I’m not going to talk today about that because I know that whatever I say about what’s going on politically or in the markets today, will be out of date by the time anyone actually sees the video.

What I would like to do is say a little bit about what we’ve been doing in the last year or so, just to set the scene for the questions.

CLIVE HOPKINS

Yes, it’s been a busy year.

TIM

Been a busy year, indeed.

So we’ve completed our triennial valuation to check that we’ve got enough assets to meet our liabilities. We’ve done a major piece of work on developing further our long-term de-risking plan.

We’ve done the asset allocation work, which more later.

We’ve moved our services to our back office, I think, generally, pretty successfully.

And for me, perhaps most important of all, we’ve paid our pensions on time throughout the year. That’s £40 million a month we’re paying now. So it’s quite a number there.

Let me start with the first question that we’ve been asked and, Clive, this is one for you.

The question is, you mentioned in the Source that the Board were carrying out a strategic asset allocation review of the SCPF’s investment portfolio. Is that now complete?

CLIVE

Yes. Let me first say that we carry out a valuation every three years, an actuarial valuation. The most recent one was as at the end of 2017. The actuary determined that the funding ratio stemming from that valuation was 108% which means that the fund’s assets value was 8% greater than the liabilities and the size of the fund is about £16 billion.

So we had a reasonable cushion which we’re pleased about. While the valuation is being done we prepare for another look at where our assets are allocated.

That involves quite a bit of work because we have to look at all the different types of asset, with the help of advisors, project how they might do in the future in different economic scenarios.

And there’s a lot of modelling done and then we get the various answers and decide what we’re going to do in the light of the actuary valuation. Now this chart shows how the asset allocation has been over the last three years and what it is now, what we’re implementing now.

There were three main tranches. First there’s the Liability Hedge.

These are the assets - they comprise about 33% of the fund - these are the assets which are very secure.

They include assets like index linked gilts which have the characteristics of the liabilities and so they’re very safe and sound. We’ve increased that level of assets from 31% to 33%.

Then there’s a second tranche, a new tranche that is labelled Liquidity

& Investment Grade Assets. These comprise shorter dated government bonds and other similar investments. They’re, again, very secure, they yield better than cash and they give us liquidity which we might need and also they are there if we want to take advantage of any particular opportunities.

So we have 18% of the fund in those assets. And finally, there are Return Seeking Assets. These comprise the traditional assets like equities, private equity, hedge funds, property, high-yield bonds and such like.

These are all assets which over time we would expect to yield rather more

than the defensive assets but of course that carries a risk with it and that’s something we have to weigh. Overall, we’ve reduced the level of funds invested in these return seeking assets and it’s now come down to 49%.

That was one of the fruits of doing the valuation. We could see that we could do that. In fact, we decided then to take the risk off in respect of some equities and high-yield bonds and so on.

Back in August, fortunately. Yes, back in August and while we don’t aim to do timing, that was, in retrospect, it seems like a wise decision. Overall, we have some 49% in return seeking assets, so just under half of the fund. And the other half, 51%, is invested in secure defensive assets.

TIM

The next question which really follows on from that, Clive, is how do you manage portfolio risk and diversification?

CLIVE

It’s a good question.

Some of the strategic asset allocation process is concerned with that because in looking at all of the different types of assets, we’re looking at what we would expect them to yield and what the risks are.

I think a good perspective is to, building on what you were saying earlier about £40 million per month payable from the fund, this chart shows the projected payments from the fund right through to the very last payment to the very last pensioner.

So it goes right through to the end of this century. You can see that we haven’t peaked yet. We’ll be another 15, 20 years before the payments peak and then they will gradually reduce.

So in our long-term investment thinking we’re trying to determine a glide path which will enable us to meet all of those benefits, selling investments as we need with little dependence on the company.

We hope to be able to, well, we intend to secure all those pension payments by having the right level of investment. As for the question of diversification, that’s very important.

The strategic asset allocation exercise makes sure that we have a diverse bunch of assets. We don’t want to have all our eggs in one basket.

The theory behind that is quite simple, that if certain asset classes

do very badly, we’ve got other ones that should compensate.

TIM

That chart is really very interesting because it shows what a range of perspectives the trustees have got to have.

There’s both the here and now paying the pensions but also a very long perspective.

CLIVE

It’s a very long perspective and that’s something that we try to take account of in the Board.

We try to avoid knee-jerk reactions and take a steady as you go process.

TIM

The next question, Sue, this one I think I’ll direct your way, if I may. In the Source it mentions that the company contributions will reduce from 20% to 10% in 2019. Are they likely to reduce even further and what does this mean for the fund?

SUE JONES

Because of the current funding level, the company does not need to make contributions directly into the fund itself. However, it does provide additional support through the additional reserve account.

CLIVE

It could have had just a contribution holiday but decided to pay something else into the reserve account.

SUE

Yes, correct.

And we have agreed with the company that this will reduce to 10% from the beginning of 2019. We do review the level of contributions with the company and this is part of the three-year valuation cycle, to make sure that contributions are not needed to be put into the fund directly.

CLIVE

So we have an extra buffer that we could draw on if we really needed to but at the present time where we have a significant surplus that’s not necessary.

SUE

Yes.

TIM

And maybe following on from that, we received a question on the timing of the valuations. So, Sue, the 2018 Source gives the results of the valuation as at 31st December, 2017. Why does it take so long to produce the answer?

SUE

Well, the valuation reviews the fund’s financial position at a specific date. It’s a lengthy process. The statutory deadline for completing a valuation, for submitting a contributions schedule and a recovery plan is 15 months from the valuation date. For us that would be 31st March, 2019. We start with an in-depth analysis of the current membership, the benefit structure and the assets.

The Board take a considerable time to review these assumptions in depth before making assumptions of which ones to use. We also consult with the company.

TIM

So actually it’s a big process but we do it reasonably quickly...

SUE

Yes, correct.

TIM

..is what I take away from that.

The next question is one dear to members’ hearts.

Some pension schemes have changed how they increase pensions from RPI to CPI and will the SCPF? This question, of course, is of great interest to all members because the Retail Price Index generally gives a higher increase than the Consumer Price Index, not always but in most years.

Which index is to be used depends specifically

on the precise wording of the trust deed governing the fund. And in the case of the SCPF the deed refers to the index of retail prices, which is now known as RPI, or any broadly comparable index and it’s for the trustees to determine this.

The trustees have no plans to change from RPI. So I think members

will be reassured by that.

SUE

Yes.

TIM

The next question, Clive, this one is for you.

You have both SAMCo and Aon as an investment advisor. How do they work together?

CLIVE

It’s a fair question.

Our funds are managed by SAMCo which is the Shell Asset Management Company based in the Netherlands. It’s an in-house team that does all the investing and it’s been running for some 15 years. We’ve had good results from it.

But we do also have an external investment advisor in Aon which is one of the large, consulting actuarial firms who, by the way, also do our actuarial valuations.

The reason we have an external advisor too is so that we don’t become

too incestuous. We feel we need to have external challenge in the light of what other funds are doing, how the markets are going.

But we try to foster an environment where the challenges are constructive.

So the two come together, we have differences from time to time but overall we think we get the best of both worlds by having the manager implementing and an external advisor who can challenge.

TIM

Yes, it’s a valuable role and of course it’s also one that we’re required by law to have in place.

CLIVE

I should have mentioned that, yes.

TIM

Not to understate that little point.

The next question concerns the recent Lloyds Bank case.

I understand that a recent court ruling will lead to an increased cost

to some pension schemes. How does this affect the SCPF funding and its members?

This question refers to a case concerning equalisation

of guaranteed minimum pensions.

CLIVE

Guaranteed minimum pensions, it’s the old state scheme.

If you wanted to contract-out of it you had to promise a pension which was broadly equivalent to the older state scheme.

For most people that’s quite a small element of their pension.

But you had to promise to provide GMPs, as they’re called.

TIM

Indeed. Thanks, Clive.

This is an immensely complicated area. While there’s been the court ruling that we have to carry out the equalisation, we’re still reliant on getting some further regulatory guidance and take some guidance from HMRC

on how to do it.

It’s going to take quite a long time to work through all this but from our initial analysis we don’t expect any material impact

on the fund itself.

SUE

Good.

TIM

The final question, well, actually it’s two questions.

Does each trustee director have a specific role on the Board and how do I become a trustee?

Maybe, Sue.

SUE

There is no specific role for a trustee director. We serve on one of the two committees, either the Investment Committee or the Technical

and Communications Committee, which looks at actuarial, risk, audit and communication matters.

TIM

Yes, we have eight directors now. So it’s four and four on the two committees. Eight is...

CLIVE

It’s a good number.

The Board used to be much larger originally when we started. When we had 20,000 members, we had 18 trustee directors. Nine of whom were elected and nine of whom were nominated by the company.

But now it’s reduced considerably and it’s four and four.

TIM

We’ve found that it works well.

On the second part of the question - how do I become a trustee?

The trustees, four elected by the members and four are appointed by our sponsor and we do have member-nominated trustee elections coming up later in 2019.

So I encourage people to look out for the announcement about those.

We’ve always had a very good slate of candidates and we hope to do the same this year.

CLIVE

It’s a very interesting role, so I would urge people to apply.

TIM

Yes, not short of interest.

CLIVE

As we said at the beginning, it’s fast moving.

TIM

Yes, I think we’d better wrap it up there. So thank you very much everyone who’s looking at the video. I hope you found it interesting.

Thank you, Sue. Thank you, Clive, and goodbye.

CLIVE

Goodbye.

SUE

Goodbye.

An interview with Tim Morrison

In this short video, Tim talks about what has been keeping the Board busy and the areas they will be concentrating on in the coming years. Also look out for this year’s edition of the Source due out in November 2018, which includes the results of the recent Actuarial Valuation.

be very very careful that you choose a reputable and reliable provider.

01:04:28:24 01:04:31:23

There's increasing interest in how climate change

01:04:31:23 01:04:35:09

will affect major asset holders such as pension funds.

01:04:35:09 01:04:37:09

It's also generally reckoned that

01:04:37:09 01:04:41:16

the financial impacts of climate change will be material

01:04:41:16 01:04:45:17

but quite what form they take, and over what timescale

01:04:45:17 01:04:47:09

is still very uncertain.

01:04:47:09 01:04:49:12

How society responds to climate change

01:04:49:12 01:04:51:24

affects the Fund in two main areas.

01:04:51:24 01:04:55:02

First the strength of Royal Dutch Shell as our sponsor,

01:04:55:02 01:04:57:15

and second our investment strategy.

01:04:57:15 01:05:00:17

We are monitoring how all this affects the oil industry in general,

01:05:00:17 01:05:02:07

and Shell in particular.

01:05:02:07 01:05:04:12

We're actually more interested in the longer term,

01:05:04:12 01:05:08:10

say over 10, 20 plus years, than in the very short term

01:05:08:10 01:05:10:24

because the current covenant is so strong.

01:05:10:24 01:05:15:17

On the investment side a holding in fossil fuel businesses is very small

01:05:15:17 01:05:18:04

as a proportion of our total assets.

01:05:18:04 01:05:20:22

So what we're really interested in is the impact

01:05:20:22 01:05:23:04

on the global economy as a whole.

01:05:23:04 01:05:25:15

We're interested in how this translates

01:05:25:15 01:05:28:04

into the returns on different types of assets.

01:05:28:04 01:05:31:10

This is a very complex question and we'll be devoting

01:05:31:10 01:05:33:19

a lot of time to this over the years to come.

01:05:37:19 01:05:40:04

We're monitoring Brexit developments carefully

01:05:40:04 01:05:42:21

to make sure our current operations aren't disrupted

01:05:42:21 01:05:45:23

and that our arrangements with service providers

01:05:45:23 01:05:48:01

aren't disturbed in any way.

01:05:48:01 01:05:50:19

We don't think the funding level will be materially affected

01:05:50:19 01:05:52:02

by an orderly Brexit.

01:05:56:02 01:05:59:16

There's been a lot of worrying news about pension funds recently.

01:05:59:16 01:06:04:09

This mainly concerns poorly funded schemes with weak sponsors.

01:06:04:09 01:06:07:12

The SCPF is in a very different place.

01:06:07:12 01:06:08:24

There will be challenges, of course,

01:06:08:24 01:06:11:03

but we're well positioned to deal with them.

01:06:11:03 01:06:13:05

We have excellent advisors,

01:06:13:05 01:06:16:17

we have a well-informed and well experienced Board,

01:06:16:17 01:06:18:04

we're well funded,

01:06:18:04 01:06:20:23

and we have a strong sponsor in Royal Dutch Shell.

<end transcript>

The Source

The Source is the annual newsletter from the Trustee of the SCPF. The latest issue came out in November 2018. If you would like to view the electronic version, you can view it here.

2017 MND Elections

The SCPF are looking for two pensioner members to join the Board of the Trustee Company. If you’re interested in becoming a Member Nominated Director (MND) read the “Introduction to Trusteeship” and the “Election Rules” available on the election website www.ersvotes.com/shellpensions before the nomination deadline of 31 August 2017. You can also view the short video on what it’s like to be an MND.